Aggregate Planning

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Production Planning Horizons

Long-Range Capacity Planning Long-Range (years) Medium-Range (6-18 months) Short-Range (weeks) Very-Short-Range (hours - days)

Aggregate Planning

Master Production Scheduling Production Planning and Control Systems

Production Planning: Units of Measure

Long-Range Capacity Planning Entire Product Line Product Family Specific Product Model Labor, Materials, Machines

Aggregate Planning

Master Production Scheduling Production Planning and Control Systems

The long term plan is defined at the corporate level. These decisions are more strategic. This activity is often referred to as "strategic planning". The following needs to be addressed in a strategic plan which market segment ? how to reach it ? which plant / facility ? which prodn policy ? (make to order, make to stock etc.) which prodn system ? (cellular, job shop, mixed etc.)

Steps in Aggregate Planning

Define an aggregate unit An aggregate unit, such as the labor hour or the machine hour must be selected in order to translate the demand for the different products into the same units. This unit must be related to the capacity you want to plan (machine or manpower).

Estimate aggregate demand (over 12-24 months) Here we need the monthly forecast for all the products for the period considered (the intermediate term). These forecasts are translated into aggregate units.

Determine an aggregate production plan; On the basis of this demand, we can select the best production plan.

Aggregate Planning Objectives

Minimize Costs/Maximize Profits Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates Minimize Changes in Workforce Levels Maximize Utilization of Plant and Equipment

Managerial Inputs

Aggregate plan

Managerial Inputs

Demand forecasts

Aggregate plan

Managerial Inputs

Demand forecasts

Aggregate plan

Accounting and finance Cost data

Managerial Inputs

Demand forecasts

Aggregate plan

Accounting and finance Cost data

Human resources Labor-market conditions Training capacity

Managerial Inputs

Demand forecasts

Aggregate plan

Accounting and finance Cost data

Engineering New products Product design changes Machine standards

Human resources Labor-market conditions Training capacity

Managerial Inputs
Operations Current machine capacities Plans for future capacities Workforce capacities Current staffing level

Demand forecasts

Materials Supplier capabilities Storage capacity Materials availability

Aggregate plan

Accounting and finance Cost data

Engineering New products Product design changes Machine standards

Human resources Labor-market conditions Training capacity

Aggregate Planning Process

Determine requirements for planning horizon

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

Is the plan acceptable?

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

No

Is the plan acceptable?

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

No

Is the plan acceptable?

Yes Implement and update the plan

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

No

Is the plan acceptable?

Move ahead to next planning session

Yes Implement and update the plan

Aggregate Planning Costs

Regular-Time Costs Overtime Costs Hiring and Layoff Costs Inventory Holding Costs Backorder and Stockout Costs

Production Plan
Quantity Produced during a period 1500 1250 1000 750 500 250 0 | 1 | | 2 3 Quarter | 4
Requirements

Production Plan
Quantity Produced during a period 1500 1250 1000 750 500 250 0 | 1 | | 2 3 Quarter | 4
Requirements Production plan

Production Plan
Inventory accumulation

Quantity Produced during a period

1500 1250 1000 750 500 250 0 510 | 1 | | 2 3 Quarter | 4

Requirements Production plan

300

Production Plan
Inventory accumulation

Quantity Produced during a period

1500 1250 1000 750 500 250 0 510 | 1 | | 2 3 Quarter | 4

400

Inventory consumption Requirements Production plan

110 300

Three Methods of Aggregate Planning

Level Strategy - Constant Work Force, and as demand changes Vary Only Inventory & Stock outs Chase Strategy - as demand changes, hire and layoff to produce the units required. Some inventory also has to be accounted for, because of rounding errors Mixed Strategy - use any or all of the production variables to determine the lowest cost plan

Production Variables As demand changes these are the things management can change to meet the changing demand. include: Number of workers - More or less workers by hiring and layoff changes the number of units one can produce Inventory - If you have additional capacity now, produce extra units and store them in inventory to satisfy increasing demand in the future These variables

Production Variables Stock out - This is negative inventory. If demand is more than you can produce, use a stock out and satisfy demand in the future when capacity exceeds demand. Attempt should be such that stock outs do not occur in the last period of any aggregate plan.

Subcontracting - Pay some other business to produce extra units needed.

Overtime - Ask employees to produce more units by working, for example, more than the normal eight hours/day or 40 hours/week.

LEVEL STRATEGY Example 1

Level Strategy for Services

Dock

Aisle

Level Strategy for Services

TIME PERIOD 1 Requirement* 6 2 12 3 18 4 15

Dock

Aisle

5 13

6 14

Total 78

Current employment = 10 part-time emp

* Number of part-time employees

Level Strategy for Services

TIME PERIOD 1 Requirement* 6 2 12 3 18 4 15

Dock

Aisle

5 13

6 14

Total 78

Current employment = 10 part-time emp 1. 2. 3. 4.

* Number of part-time employees

No more than 10 new hires in any period No backorders are permitted Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: Regular-time wage 2,000/period at 20 hours/week Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

Level Strategy for Services

TIME PERIOD 1 Requirement* 6 2 12 3 18 4 15

Dock

Aisle

5 13

6 14

Total 78

Current employment = 10 part-time clerks Requirement Peak 1. 2. 3. 4. No more than 10 new hires in any period No backorders are permitted Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: Regular-time wage 2,000/period at 20 hours/week Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

Level Strategy for Services

TIME PERIOD 1 Requirement* 6 2 12 3 18 4 15

Dock

Aisle

5 13

6 14

Total 78

Current employment = 10 part-time clerks Requirement Peak 1. 2. 3. 4. No more than 10 new hires in any period No backorders are permittedemployees in peak period 1.20w = 18 Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: Regular-time wage 2,000/period at 20 hours/week Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

Level Strategy for Services

TIME PERIOD 1 Requirement* 6 2 12 3 18 4 15

Dock

Aisle

5 13

6 14

Total 78

Current employment = 10 part-time clerks Requirement Peak 1. 2. 3. 4. No more than 10 new hires in any period No backorders are permittedemployees in peak period 1.20w = 18 Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: 18 w2,000/period15 20 hours/week = = at employees Regular-time wage 1.20 Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

TIME PERIOD 1 Requirement level undertime overtime Hires Fires 6 15 9 0 5 0 2 12 15 3 0 0 0 3 18 15 0 3 0 0 4 15 15 0 0 0 0 5 13 15 2 0 0 0 6 14 15 1 0 0 0

Total 78 90 15 3 5 0

Cost

180000 9000 5000 0 194000

LEVEL STRATEGY Example 2

Know the demand We would have to know each forecast value for the time period of our aggregate plan. Consider the following forecasting information.
Month Forecast J a ry nua 1,800 Fe . b 1,500 Ma rch 1,100 Ap ril 900 Ma y 1,100 J une 1,700

Safety stock Its purpose is to satisfy demand when demand is greater than what we expect ( the forecasted value). A very simple method based on company policy can be used to calculate safety stock. For eg. The safety stock value could be 25% of the forecasted value for that period.

Month Forecast Safety Stock

J a ry nua 1,800 450

Fe . b 1,500 375

Ma rch 1,100 275

Ap ril 900 225

Ma y 1,100 275

J une 1,700 425

The beginning inventory value (in this case for Jan.) would have to be known before we could continue. In some cases one can assume the value is zero to continue with calculations. The remaining beginning inventory values are determined from the safety stock in the previous period.

Month Forecast Safety Stock Beginning Inventory

J a ry nua 1,800 450 400

Fe . b 1,500 375

Ma rch 1,100 275

Ap ril 900 225

Ma y 1,100 275

J une 1,700 425

Production Required is determined by adding the forecast plus the safety stock and subtracting the beginning inventory for each period: FORECAST + SAFETY STOCK - BEGINNING INVENTORY
J a ry nua Forecast Safety Stock Beginning Inventory Required Production 1,800 450 400 1,850 Fe . b 1,500 375 450 1,425 Ma rch 1,100 275 375 1,000 Ap ril 900 225 275 850 Ma y 1,100 275 225 1,150 J une 1,700 425 275 1,850

Starting Conditions Storage or inventory holding Cost = Rs. /unit-month Standard Pay Rate = Rs. /hour Overtime Rate = Rs. /hour Cost of Stockout = Rs. /unit-month Cost of Subcontracting = Rs. /unit Hiring and Training Cost = Rs. /person Layoff Costs = Rs. /person Worker-hours/unit = hrs/unit Manufacturing Cost = Rs. Beginning Work Force = No. of workers

Storage Cost (Inventory holding cost) = Rs. /unit-month Each unit that is held in inventory for one month will cost us some amount. This cost includes the costs of storage space administrative costs lost income (cost of capital) from having this item sitting in inventory

Standard Pay Rate = Rs. /hour This is the hourly wage rate for direct labor.

Overtime Rate = Rs. /hour Often when employees work more than the regular time, they are paid at a higher pay rate for the addition hours. This higher pay rate is usually 1.5 times the Standard pay rate. Eg. If regular rate is 60/hr 1.5 times Rs. 60 = Rs. 90 /hr

Cost of Stockout (back order) = Rs. /unit-month This is our cost if we fail to satisfy demand. This cost includes the cost of: Penalties Possible loss of sale if customer buys from an other business Possible loss in future sales Loss of good will Administrative customers. cost for keeping track of back-ordered

Cost of Subcontracting = Rs. /unit Cost of having an other business produce one unit of product to meet the demand. This is given as a marginal cost or as a total cost.

Marginal Cost : the cost in addition (above and beyond) our cost to produce that same unit (the manufacturing cost).

Total Cost : the amount the other business would receive for producing one unit.

Hiring and Training Cost = Rs. /person This is the cost to add another employee to our work force. This includes the cost of: advertising interviewing and selection training and less than full productivity for the new employee during the training period

Layoff Costs = Rs. /person This includes the cost of: Severance pay Increases in unemployment insurance Negative reactions by remaining workers because of

uncertainties about their futures

Worker-hours/unit This is the direct labor content of the product being manufactured. It can be used for cost calculations. For eg. If wage rate is Rs. 60/hr and it takes 5 hrs/unit Direct labor cost/unit is 5 hours/unit X 60/hour = Rs. 300/unit As a comparison; if we produce one unit using overtime, the cost would be 5 hours/unit X 90/hour = Rs. 450/unit. The difference (450 - 300) Rs. 150 is the marginal cost of producing a unit on overtime.

Beginning Work Force This is the number of production workers we have when we start aggregate planning If we want to produce more units than this work force can produce on regular time, than we would need to hire additional workers and pay the hiring and training costs for those new employees

The first question is How many workers?

J a ry nua Forecast Safety Stock Beginning Inventory Days in a month Required Production Cum Prodn 1,800 450 400 22 1,850 1,850

Fe . b 1,500 375 450 19 1,425 3,275

Ma rch 1,100 275 375 21 1,000 4,275

Ap ril 900 225 275 21 850 5,125

Ma y 1,100 275 225 22 1,150 6,275

J une 1,700 425 275 20 1,850 8,125

How many workers? 8,125 units need to be produced during Jan. - June Assume that each unit requires 5 labor hours and each worker works 8 hours/day The 6-month period Jan. - June includes 125 work days (8,125 units X 5 hours/unit) / (8 hours/person day X 125 days) = 40.6 persons 40.6 is rounded up (to 41), because if we round down we will not produce the required 8125 units.

Cumulative Produced These values are calculated from the formula: (number of workers X hours/day X number of days) / (5 hours/unit) For Jan.: (41 workers X 8 hours/day X 22 days) / (5 hours/unit) = 1443.2 and rounding normally to 1443. For Feb the only difference is 41 cumulative days in place of 22. The result is 2689.6 and rounded to 2690

J a ry nua Forecast Safety Stock Beginning Inventory Days in a month Cum Days Required Production Cum req Prod Actual Cum Prod Excess Shortage 1,800 450 400 22 22 1,850 1,850 1443 0 407

Fe . b 1,500 375 450 19 41 1,425 3,275 2690 0 585

Ma rch 1,100 275 375 21 62 1,000 4,275 4067 0 208

Ap ril 900 225 275 21 83 850 5,125 5445 320 0

Ma y 1,100 275 225 22 105 1,150 6,275 6888 613 0

J une 1,700 425 275 20 125 1,850 8,125 8200 75 0

10,000 Cum Production 8,500 7,000 5,500 4,000 2,500 1,000 0 1 2 3 4 5 6 7 Quarter Req cum prodn Act cum prod

Excess or (Short) = (Cumulative Production Required) - (Cumulative Produced) Shortage Costs This cost is the number short in any period X the stock out cost For Jan it is (407 units) X stock out cost Storage Costs This cost is the number excess in any period X the storage cost For April it is (320 units) X shortage cost

If we have 36 workers in the beginning of the planning horizon, Hiring Cost = (41 required workers 36 available workers) X hiring cost Lay-off Cost = 0 Total Cost = storage + shortage + hiring + Lay-off

Chase Strategy

Workers Required From the Beginning Information and Starting Conditions we know: 1,850 units need to be produced during Jan. Each unit requires 5 labor hours Each worker works 8 hours/day The month of Jan. has 22 work days (1850 units) X (5 hours/unit) / (8 hours/person-day) X (22 days) = 52.56 persons 52.56 is rounded up (to 53), because if we round down we will not produce the required 1850 units. Remember that a chase strategy doesn't allow stock outs

Units Produced In Jan. if each person works 8 hours each of the 22 days, the number of worker hours available to produce products will be: (53 people) X (8 hours/day) X (22 days) = 9328 worker hours

The number of units that can be produced in Jan. will be the total worker-hours available in Jan. divided by the number of worker-hours required for each unit. For Jan.: (9328 worker hours) / (5 worker hours/unit) = 1865.6 units We can round it to 1866

Workers Hired People Hired is the number of additional people needed to meet the demand. For Jan. it is the difference between 53 (people required in Jan.) and the 36 people at the start. 53 - 36 = 17

Hiring Cost In Jan. company hired 17 additional employees. The cost of hiring 17 people is 17 X Hiring cost

People Laid Off This is similar to people hired. It is the number of fewer workers we need as demand declines. For Feb., it is 53 - 47 = 6.

Layoff Cost The cost of Laying Off 6 people is 6 X lay-off cost

Ending Inventory Ending inventory is the number of cumulative unused units at the end of any one month. Cumulative means we need to consider not only what happens this month, but also what happened the previous month.
Prod. Reg. 1,850 1,425 1,000 850 People Req. 53 47 30 25
Units Prod. 1866 1429 1008 840

Jan. Feb. March April

People Hired 17 0 0 0

People LaidOff 6 17 5

En ding In v. 1 6

20
28 1 8

Inventory Cost Number of units in Ending Inv. for any one month x holding Cost

The beginning inventory for Jan. is 0. We need 1850 units and we produce 1866. The difference (1866 - 1850 = 16) is the Ending Inv. for Jan. For Feb. one needs to consider the inventory in the previous month (16 for Jan.) In Feb. with 47 people one can produce 1429 units. 1429 is 4 more than than the production required (1425). These 4 additional units added to Jan. Ending Inv. gives 20 units of Ending Inv. in Feb.

Example

Product A B C
2.5 hrs/gallon

Q1 2500 7500 30000

Q3 12500 20000 25000

Q3 7500 20000 27500

Q4 7500 7000 33000

65 days/quarter 8 hrs/day Hiring cost = 1000 Firing cost = 2000 Inventory carrying cost = 50 per gallon per quarter Stock out cost = 100 per gallon per quarter Starting work force = 200

Find the following for Level and Chase strategies

No. of workers required per day Units produced per quarter Beginning and end inventories Inventory costs Stock out costs Hire and lay-off costs

Quarter Req Production

Q1 40000

Q3 57500

Q3 55000

Q4 47500

Master Production Scheduling

Objectives of MPS
Determine the quantity and timing of completion of end items over a short-range planning horizon. Schedule end items (finished goods and parts shipped as end items) to be completed promptly and when promised to the customer. Avoid overloading or under-loading the production facility so that production capacity is efficiently utilized and low production costs result.

Master Production Scheduling

PAREN T
Independent Demand

Dependent Demand

COMPONE

Master Production Scheduling

Months Aggregate Production Plan shows the total quantity of bicycles Weeks Master Production Schedule Shows the specific type and quantity of bike to be produced Road bike Hybrid bike Mountain bike 100 500 300 100 500 100 450 100 100 450 1 January February

1,500 2 3 4 5

1,200 6 7 8

Master Production Scheduling

Arizona Instruments produces bar code scanners for consumers and other manufacturers on a produce-to-stock basis. The production planner is developing an MPS for scanners for the next 6 weeks. The minimum lot size is 1,500 scanners, and the safety stock level is 400 scanners. scanners in inventory. There are currently 1,120 The estimates of demand for

scanners in the next 6 weeks are shown on the next slide.

Master Production Scheduling

Demand Estimates
CUSTOMERS BRANCH WAREHOUSES MARKET RESEARCH PRODUCTION RESEARCH

WEEK

500 1000 500 200 700 1000 200 300 400 500 300 200 0 10 50 0 0 0 0 0 10 0 0 0

Master Production Scheduling

WEEK

1
CUSTOMERS BRANCH WAREHOUSES MARKET RESEARCH PRODUCTION RESEARCH TOTAL DEMAND BEGINNING INVENTORY REQUIRED PRODUCTION ENDING INVENTORY

500 1000 500 200 700 1000 200 300 400 500 300 200 0 10 50 0 0 0 0 0 10 0 0 0

710 1350 900 700 1010 1200 1120 410 560 1160 460 950 0 1500 1500 0 1500 1500 410 560 1160 460 950 1250

Master Production Scheduling

WEEK

1
SCANNER PRODUCTION

4 0

1500 1500

1500 1500

Rough Cut Capacity Planning

As orders are slotted in the MPS, the effects on the production work centers are checked

Rough cut capacity planning identifies under-loading or overloading of capacity

Rough Cut Capacity Planning

Texprint Company makes a line of computer printers on a produce-to-stock basis for other computer manufacturers. Each printer requires an average of 24 labor-hours. The plant uses a backlog of orders to allow a level-capacity aggregate plan. This plan provides a weekly capacity of 5,000 labor-hours. Texprints rough-draft of an MPS for its printers is shown on the next slide. Does enough capacity exist to execute the MPS? If not, what changes do you recommend?

Rough Cut Capacity Planning

WEEK 1 PRODUCTION LOAD CAPACITY UNDER or OVER LOAD 2 3 4 5 TOTAL 1030

100 200 200 250 280

2400 4800 4800 6000 6720 24720 5000 5000 5000 5000 5000 25000 2600 200 200 1000 1720 280

Rough Cut Capacity Planning

Rough-Cut Capacity Analysis The plant is under-loaded in the first 3 weeks (primarily week 1) and it is overloaded in the last 2 weeks of the schedule. Some of the production scheduled for week 4 and 5 should be moved to week 1.

MPS rules
Do not change orders in the frozen zone Do not exceed the agreed on percentage changes when modifying orders in the other zones

Frozen No Change 1-2 weeks

+/- 5% Change 2-4 weeks

+/- 10% Change

+/- 20% Change 6+ weeks

4-6 weeks

MPS rules
Try to level load as much as possible Do not exceed the capacity of the system when promising orders. If an order must be pulled into level load, pull it into the earliest possible week without missing the promise.